More than 12 percent of the 306 million-euro ($436 million)
Franklin European Small-Mid Cap Growth Fund is devoted to Irish
companies, including C&C Group Plc and Irish Continental Group
Plc. Greek retailer Jumbo SA takes up 4.2 percent, according to
factsheets. Lugo, who beat his benchmark by 41 percentage points
between 2002 and 2011, bought Spanish companies last month and
is considering purchasing Portuguese stocks, he said in an Aug.
31 interview.

“We’re trying to run into areas where people are running
away because where you find a high return is where you see a lot
of distress,” Lugo, who is based in New York and helps oversee
$2 billion, said. “We step back and try to stay away from the
noise because we’re long-term investors.”

Bailouts, austerity plans and surging bond yields have
prompted investors to flee markets in Spain, Portugal, Italy,
Greece and Ireland, also known as Europe’s peripheral nations.
Equity indexes in those five countries have fallen 19 percent on
average this year, Bloomberg data show, reducing prices for
buyers betting an economic slowdown may not be as steep as
estimated.

More Than Doubled

The Franklin small- and mid-capitalization fund is down 19
percent in euros this year, compared with a 14 percent decline
for the MSCI Europe Small Caps Growth index, according to
Bloomberg data. The fund more than doubled between 2002 and the
end of last year, beating the MSCI index by 41 percentage
points, the data show. The fund has been in the top 11 percent
among peers in the past five years.

European authorities are wrangling over measures to combat
the euro-area debt crisis. Demands by Finland for collateral as
a condition for contributing to a second rescue package for
Greece has triggered other countries to seek the same
conditions, threatening to delay the plan.

“We just entered Spain and are looking at opportunities in
Portugal,” said the fund manager, declining to elaborate on
which stocks he purchased or is considering buying. The fund’s
latest data, valid as of June 2011, don’t include any holdings
in the Iberian peninsula. “The companies we’re buying will do
well regardless what happens in Europe over the next months.”

Stock Declines

Jumbo, Greece’s biggest toy retailer, has declined 71
percent from its peak in July 2007. Dublin-based C&C, a
manufacturer and distributor of branded alcoholic drinks, is
trading at about a fifth of its value in January 2007. Irish
Continental, which sells holiday packages, has lost about 45
percent of its value since October 2007.

Spain’s IBEX 35 Index is trading at 9.3 times the expected
profits of its members, according to Bloomberg data. That is
higher than the 8.8 ratio for Germany’s DAX Index. The price-to-earnings ratio for Greece’s ASE Index is 10.5, the data show.

Among other companies in the fund, Lugo holds shares in
Prysmian SpA, a telecommunications and energy-cable company
based in Milan, stock in Irish distributor DCC Plc, which has
fallen 19 percent this year, and shares in Beneteau SA, a French
yacht maker which has lost 29 percent in 2011.

Norway’s oil fund has also increased its investments in
small-sized companies in debt-burdened European countries such
as Italy and Greece over the past 18 months, Yngve Slyngstad,
the head of the $544 billion fund, said on Aug. 30.

The Euro Stoxx 50 Index last month reached the lowest
valuation relative to estimated earnings since March 2009, when
a one-year rally began.

“Over the long run, Europe will recover,” Lugo said.
“Overall, peripherals are very, very attractive. Will Greece
recover? It will take time, but there’s a high probability that
that will happen.”